In today’s global business environment, products must be developed quickly and inexpensively, and manufactured at the lowest cost. Where the products are developed is irrelevant – productivity is the key. The companies that can utilize global resources effectively will generate growth and success!

Adapt or fail

The prolonged business recession in this new century is bringing significant and irreversible changes in a competitive, global environment. Industrial automation end-users and suppliers alike have had to cope with declining business. The trend has brought mergers, acquisitions, divestitures and consolidations in its wake. How will the tide turn?

In today’s global markets every business is pitted against worldwide competitors with consistently improving productivity, better performance and shrinking prices. For automation suppliers, this global competitiveness is simply reflected back with increasing demands in every direction.

Almost every segment of business is undergoing significant change. For end-users, manufacturing plants must be smaller, more productive, more flexible, with location typically determined by proximity to raw materials, or customers. For automation suppliers, products must be designed to meet global end-user needs, with integration and maintenance services that are local for all customers.

Many automation products have become commodities

Industrial automation equipment is used in factories and process plants to provide productivity improvements for end users. A couple of decades ago, many automation products used proprietary technology that provided true customer value and generated good growth and profit margins.

Over the past few years most automation products today have become commodities – available from several sources with marginally different features and benefits. This makes them subject to drastic price reductions and stiff competition, causing a general business decline. A recession makes the competition more brutal, as competitors cut prices in their struggle to survive.

The core features and functions of PLC and DCS systems are easily copied and the cost reduces to quality manufacture of commodity hardware with the lowest labor and overhead. Software is even more easily copied – if not directly, then at least through availability of functional equivalents.

Offshore manufacturing & design

Beyond just trained labor, knowledge work such as design and engineering services are also being outsourced. This trend has already become significant in the US, causing joblessness not only for manufacturing labor, but also for traditionally high-paid engineering positions. Supposedly innovation, the true source of value, remains; but that too is in danger of being dissipated – sacrificed to a short-term search for profit.

Most US and European companies have been though the treadmill of quality and cost improvements – TQM, Lean Manufacturing, and the like. But offshore companies too have quickly learned the drill. So, the cost differentiation comes down directly to relative wage scales. Beyond just lower cost labor, many offshore manufacturers are also investing heavily in new equipment, so there is often a production facilities advantage.

Software can be developed quickly and cheaply in countries like India, which have rapidly become software development centers. Indeed, outsourced software development is not only cheaper, it is produced in shorter timeframes, and in many cases it is better – innovative features and tight code.

With the recent lack of growth, US automation suppliers are looking to maintain or increase profits through the only means available – reducing costs through offshore outsourcing. Major automation suppliers like Honeywell, Invensys, Emerson, Rockwell and General Electric have already transferred major chunks of manufacturing to China and software development to India. In a global environment, this makes good business sense. We should not complain – but adapt.

Chinacosm

It's clear to many people today that China is poised to take over the world's manufacturing. In China today, some 18 million people enter the work force each year, with typical wages of less than $1 a day. Manufacturing workers outside of China are being displaced on a large scale; even Mexico is losing jobs to China. Already a significant share of manufactured goods is sourced in China. Wal-Mart, the retailing giant, buys more than $ 12 billion a year from China and provides a direct outlet for Chinese manufactured goods into the US. Most economists agree that this has contributed to low US inflation.

The idea that Chinese workers are replacing physical labor elsewhere has long been accepted. Just a few years ago, China was thought of as a place to make toys and sneakers, not semiconductors. But today, the specter of Chinese high tech looms and the world’s most populous country is poised to replace the world's knowledge workers as well.

The technology analyst George Gilder has coined the term “Chinacosm” to express the rise of technology leadership in China. Silicon-valley venture capitalists predict that over the next decade China will become a ferociously formidable competitor in virtually every high tech arena.

Consider some of China's recent high-tech milestones:

China is now turning out 700,000 engineers a year, 37% of all college graduates, all trained in a university system that is rapidly growing in size and quality.

Chinese universities granted 465,000 science and engineering degrees last year – approaching the US total.

China will become the world's second-largest chip producer by 2004.

2 Chinese vendors of network switches have opened US and European offices and snatched contracts from Cisco and Nortel.

China has been launching satellites for years and began manned space missions in 2003.

In China, engineers pay ranges from $4,000 to $8,000 a year, plus medical costs, housing and pension. As product design becomes more network-centric and less location-dependent, competition against Western engineers is becoming fierce.

Indiacosm

Software development in India has been booming in recent years. India now sells $6-8 billion worth of software annually to the US, with 60% annual growth projected over the next decade.

The stock of two software companies from Bangalore, India (where I was born) trade in US stock markets with multi-billion $ market caps. Infosys, with 2003 revenue of $750million, profit 25%, growth 38%, trades on Nasdaq with a market-cap of $11.5 billion. Wipro, with 2003 revenue of $ 900 million, growth 29%, profit 18%, trades on the NY stock exchange with a market-cap approaching $9 billion.

By mid-century, India will surpass China as the world's most populous country (China's population growth is under control; India's is not). Already the world's largest democracy, India has the advantage of a high-percentage of English-speaking scientists and engineers, generating the “Indiacosm” of the new century.

3 keys for success

To counter the offshore outsourcing trend, old aphorisms come into play – “cheap and dirty”, “you get what you pay for”. Actually, these sayings are quickly being proven wrong in this context. Of course, in some cases, poor communication of requirements generates bad results. But, by-and-large, good offshore resources produce excellent results – better, cheaper, faster.

In the future, the keys to success will be to integrate and complement local technical and marketing skills with offshore capabilities to produce a consistent stream of excellent hardware and software products.

In a global market, there are 3 keys that constitute the winning difference:

Proprietary products: developed quickly and inexpensively, with a continuous stream of upgrade and adaptation to maintain leadership. Where the products are developed is irrelevant – productivity is the key.

Global services: the special needs and custom requirements of remote customers must be handled locally, giving them the feelings of partnership and proximity.

Implementing these new directions is indeed a tall order. New and different management and leadership abilities are demanded. In the new and different business environment of the new century, the companies that can achieve these goals will generate significant growth and success! Those that don’t perform will fail!

Jim Pinto is an industry analyst and commentator, writer, technology futurist, angel investor. You can email him at: [email protected]. Or review his prognostications and predictions on his website: www.JimPinto.com